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Monthly Archives: March 2013

More Payroll Audit Relief as IRS Expands Voluntary Worker Classification Settlement Program!

March 4, 2013

The Internal Revenue Service has expanded its Voluntary Classification Settlement Program (VCSP), paving the way for more taxpayers to take advantage of this low-cost option for achieving certainty under the law by reclassifying their workers as employees for future tax periods.

The IRS is modifying several eligibility requirements, thus making it possible for many more interested employers, especially larger ones, to apply for this program. Thus far, nearly 1,000 employers have applied for the VCSP, which provides partial relief from federal payroll taxes for eligible employers who are treating their workers or a class or group of workers as independent contractors or other nonemployees and now want to treat them as employees. Businesses, tax-exempt organizations and government entities may qualify.

Under the revamped program, employers under IRS audit, other than an employment tax audit, can qualify for the VCSP. Furthermore, employers accepted into the program will no longer be subject to a special six-year statute of limitations, rather than the usual three years that normally applies to payroll taxes. These and other permanent modifications to the program are described in Announcement 2012-45 and in questions and answers, posted on IRS.gov.

Normally, employers are barred from the VCSP if they failed to file required Forms 1099 with respect to workers they are seeking to reclassify for the past three years. However, for the next few months, until June 30, 2013, the IRS is waiving this eligibility requirement. Details on this temporary change are in Announcement 2012-46.

To be eligible for the VCSP, an employer must currently be treating the workers as nonemployees; consistently have treated the workers in the past as nonemployees, including having filed any required Forms 1099; and not currently be under audit on payroll tax issues by the IRS. In addition, the employer cannot currently be under audit by the Department of Labor or a state agency concerning the classification of these workers or contesting the classification of the workers in court.
Interested employers can apply for the program by filing Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before they want to begin treating the workers as employees.

Employers accepted into the program will generally pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year.

No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years.

Employers applying for the temporary relief program available for those who failed to file Forms 1099 will pay a slightly higher amount, plus some penalties, and will need to file any unfiled Forms 1099 for the workers they are seeking to reclassify.

 
Employee Characterization of your Independent  Contractors Keeping You Awake at Night?
 

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Read more at: Tax Times blog

3.8% Medicare Investment Tax on CFC's and PFIC's Income?

March 4, 2013

A new 3.8% tax, commonly known as the “Medicare tax,” is scheduled to take effect for taxable years following December 31, 2012.

The tax is imposed on the lesser of net investment income (“NII”) or the excess of a taxpayer’s modified adjusted gross income over a threshold amount. For married taxpayers filing jointly, the threshold is $250,000; filing separately, $125,000; and for single taxpayers, $200,000.

NII is defined in IRC §1411(c)(1) as the excess of (A) the sum of (i) gross income from interest, dividends, annuities, royalties, and rents, (ii) other gross income derived from a trade or business which is a passive activity with respect to the taxpayer or which trades in financial instruments or commodities, and (iii) net gain attributable to the disposition of property over (B) properly allocable deductions.


Gain and income for purposes of IRC §1411 is generally recognized when recognized for federal income tax purposes. However, income inclusion and distributions from CFCs, PFICs, and QEFs are treated differently under the proposed regulations.

For purposes of IRC §1411, however, income inclusions from CFCs or QEFs are not included in NII.
 
Instead, income, previously included in gross income by a taxpayer after December 31, 2012 under the CFC or QEF rules, will be included in NII only when cash is actually distributed to the taxpayer.
Net gain from the disposition of stock in a CFC or QEF will be included in NII.

For example, A is a US shareholder and sole owner of a CFC. A has a basis of $500,000 in the CFC. In 2013, the CFC earns $10,000 of passive income which A must include in gross income. A would increase her basis in CFC by $10,000 for gross income purposes. In 2014, CFC distributes $30,000 to A, none of which is treated as a dividend for gross income purposes. A would reduce her basis in CFC for gross income purposes by $30,000 to $480,000. In 2015, A sells CFC for $500,000. A realizes a gain of $20,000 for gross income purposes.

In 2013, A would not include the $10,000 of passive income earned by CFC in NII and would not adjust her basis in CFC. In 2014, A would include $10,000 of previously taxed income in NII and would not decrease her basis by that amount, but only by the remaining $20,000 distribution. Finally, in 2015, A would include $20,000 of gain in NII, representing the amount realized of $500,000 less her IRC §1411 basis of $480,000.

If A instead had made an election under the regulations to treat NII and gross income the same, then A would have included the $10,000 in passive income from CFC in NII in 2013, rather than in 2014 when she received a distribution.

There is no similar addback of possessions-source income that is excluded under §931 for residents of American Samoa or under §933 for Puerto Rican residents. Thus, a resident of those possessions would only be subject to the §1411 tax if he realized substantial income from sources outside the possession where he is resident.

The regulations clarify that, in the case of residents of the other three U.S. possessions, all of which have so-called "mirror" Codes; Guam, the U.S. Virgin Islands, and the Northern Marianas,  the §1411 tax will not apply because it has not been imposed by Congress on those three possessions, and because residents of those possessions pay income tax on their worldwide income to the government of the possession where they are resident.

Section 1411(e)(1) exempts a "nonresident alien" from the §1411 tax. The proposed regulations confirm that the term "nonresident alien" is determined in accordance with the "resident alien" definitional rules of §7701(b). However, the regulations give no guidance on how to apply §1411 when an individual is a U.S. citizen or resident alien for part of the year, and a nonresident alien for the balance of the year.

The regulations do not discuss the status of so-called "treaty tie-breaker aliens" who are classified as resident aliens under §7701(b), but who are also classified as income tax residents of a country having an income tax treaty with the United States under the "tie-breaker" rules of the treaty. Regs. §301.7701(b)-7(a)(1) provides that a tie-breaker alien will be classified as a nonresident "for purposes of computing that individual's United States income tax liability under the provisions of the Internal Revenue Code and the regulations thereunder … ." Thus, whether a treaty tie-breaker alien is exempt from the §1411 tax probably depends on whether the §1411 tax is an "income tax" within the meaning of U.S. income tax treaties.

 
The Application of the New 3.8% Medicare Tax on CFC's & PFIC's Got You Confused?
Contact the Tax Lawyers at Marini & Associates, P.A.
for a FREE Tax Consultation at www.TaxAid.usor www.TaxLaw.ms
or Toll Free at 888-8TaxAid (888 882-9243).
 
 

Source:

Cohn & Reznick

BNA

Read more at: Tax Times blog

IRS Outlines Sequestration Plans Including 5 to 7 Day Furloughs

March 1, 2013

With mandatory government spending cuts looming, Acting IRS Commissioner Steven Miller sent a Memo to all IRS employees on Thursday (See Below), outlining the agency’s plans in the event sequestration occurs as planned on Friday.

He outlined spending cuts the IRS plans to make, including employee furloughs, but emphasized that the furloughs would not affect tax season. IRS employees have been informed of potential furloughs of potential furloughs of five to seven days, according to the National Treasury Employees Union. The union plans to bargain with the IRS to find enough cost savings that would spare IRS employees from the prospect of unpaid workdays.

The Internal Revenue Service says those across-the-board automatic spending cuts will not delay processing of individual income tax refunds, and may mean fewer audits.

The agency has warned its more than 100,000 employees to expect furloughs of one day per pay period — but not until this summer, after tax filing season ends.

“At this point, we expect that every one of us would take no more than one furlough day per pay period… for a total of between five to seven furlough days,” IRS Commissioner Steven Miller wrote to staff in a memo obtained by ABC News.

“The IRS is projecting between five and seven furlough days beginning sometime this summer,” NTEU president Colleen Kelley said in a statement. “We have had informal discussions with the agency about this matter and we will engage in bargaining when the formal notice of furlough is provided.”

Staffing shortages at the agency could have an impact on tax administration, taxpayer service and tax enforcement if the budget cuts go through, as well as efforts at combating identity theft-related tax fraud, in addition to the IRS’s interactions with the tax practitioner community.

Miller listed three other ways in which the IRS will cut spending: 1. Continue a hiring freeze; 2. Reduce funding for grants and other expenditures and 3. Cut costs for travel, training, facilities, and supplies.

On Thursday, the Senate rejected two bills that would have averted the sequestration, thereby almost assuring that the automatic spending cuts will occur, as required by the Budget Control Act of 2011, P.L. 112-25.
 
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====================================================================

MEMORANDUM FOR ALL IRS EMPLOYEES

FROM: Steven T. Miller /s/

Acting Commissioner

SUBJECT: Information on potential sequestration on March 1

This Friday, March 1, marks the effective date of across-the-board spending cuts for nearly all federal agencies, also known as sequestration. Should sequestration occur, we will still be able to operate, but our overall funding for the remainder of the fiscal year will be reduced. Therefore, it is essential that we prepare for whatever events may unfold and continue to look for opportunities to reduce expenses so we can minimize the impact on IRS’ mission to serve the American public and the impact on your lives as well.

If sequestration occurs, we will continue to operate under a hiring freeze, reduce funding for grants and other expenditures, and cut costs in areas such as travel, training, facilities and supplies. In addition, we will need to review contract spending to ensure only the most critical and mandatory requirements are fully funded. Despite our current and planned efforts to cut expenses, the reality is that our greatest expense, by far, is employee pay.

As a result, if sequestration occurs and our budget is reduced for the remainder of the fiscal year, it appears that a number of furlough days will be necessary given the size of the anticipated budget cut to the IRS. Let me be clear: We know that asking you to take even one furlough day is difficult. That’s why we’ve spent so much time and energy trying to minimize the impact on our employees as much as possible while carrying out our mission. We will continue to look for cost savings in the coming weeks and months.

At this point, we expect that every one of us would take no more than one furlough day per pay period, beginning sometime in the summer, after the filing season ends, and possibly through the remainder of the fiscal year, for a total of between five to seven furlough days. We will provide you with at least 30 days’ notice prior to starting furlough. We will also engage with NTEU as appropriate to ensure that any necessary furloughs are applied in a fair and appropriate manner and consistent with our collective bargaining agreements. If you have questions on this issue, we encourage you to go to the

Office of Personnel Management website, which has helpful information and answers to frequently asked questions regarding furloughs. We will provide more details regarding our sequestration contingency plans as details become available. We recognize how distracting and difficult this news may be, but we know that you and your colleagues are dedicated public servants who will continue to deliver

Source

Journal of Accountancy

ABC News

 

Read more at: Tax Times blog

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